20. LONG-TERM EQUITY-BASED COMPENSATION PROGRAM

Effective October 31, 2006, the Board of Directors approved and adopted and our sole stockholder approved the Assisted Living Concepts, Inc. 2006 Omnibus Incentive Compensation Plan (the "2006 Omnibus Plan"). On May 5, 2008, the 2006 Omnibus Plan was again approved by ALC stockholders. On April 30, 2009, the Board of Directors of ALC approved the amendment and restatement of the 2006 Omnibus Incentive Compensation Plan to reflect the March 16, 2009 one-for-five reverse stock split. On August 4, 2011, the Board of Directors of ALC approved the amendment and restatement of the 2006 Omnibus Incentive Compensation Plan to reflect the May 20, 2011 two-for-one stock split. The 2006 Omnibus Plan is administered by the Compensation/Nomination/Governance Committee of the Board of Directors (the "Committee") and provides for grants of a variety of incentive compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock units, cash incentive awards and other equity-based or equity-related awards (performance awards).

A total of 1,600,000 shares of our Class A Common Stock are reserved for issuance under the 2006 Omnibus Plan. Awards with respect to a maximum of 80,000 shares may be granted to any one participant in any fiscal year (subject to adjustment for stock distributions or stock splits). The maximum aggregate amount of cash and other property other than shares that may be paid or delivered pursuant to awards to any one participant in any fiscal year is $2.0 million.

The terms applicable to all Options/SARs that have been granted under the 2006 Omnibus Plan to date, as described below, provide that, once the options/SARs become vested, they become exercisable in one-third increments on the first, second and third anniversaries of the approval date and they expire five years from the approval date. Once exercisable, awards may be exercised either by purchasing shares of Class A Common Stock at the exercise price or exercising the related stock appreciation right. The Committee has sole discretion to determine whether stock appreciation rights are settled in shares of Class A Common Stock, cash or a combination of shares of Class A Common Stock and cash.

On February 22, 2009, the Committee approved the 2009 Long-Term Equity-Based Compensation Program and granted awards of Options/SARs to certain key employees (including executive officers). The aggregate maximum number of Options/SARs granted to all participants was 190,000 and the exercise price is $7.68 per share. The Options/SARs had both time

vesting and performance vesting features. One fifth (1/5) of each grant was vested on February 22, 2010. Also on February 22, 2010, the Committee determined that three-fourths (3/4) of the remaining four-fifths (4/5) of each grant vested. On April 30, 2009, the Committee recommended and the Board of Directors approved grants of 8,000 Options/SARs to each of the eight non-management directors. The aggregate number of Options/SARs granted was 64,000 and the exercise price is $8.27 per share.

On March 3, 2010, the Committee approved the 2010 Long-Term Equity-Based Compensation Program and granted awards of Options/SARs to certain key employees (including executive officers). The aggregate maximum number of Options/SARs

granted to all participants was 192,500 and the exercise price is $15.86 per share. The Options/SARs have both time vesting and

performance vesting features. Two-elevenths (2/11) of each grant become exercisable in one-third increments on the first, second and third anniversaries of the approval date. On March 3, 2011, the Committee determined that four-elevenths (4/11) of the grants vested and becomes exercisable in one-third increments beginning March 3, 2011.

On May 3, 2010, the Committee recommended and the Board of Directors approved grants of 10,000 Options/SARs to each of the eight non-management directors. The aggregate number of Options/SARs granted was 80,000 and the exercise price is $16.57 per share.

On March 2, 2011, the Committee approved the 2011 Long-Term Equity-Based Compensation Program and granted awards of Options/SARs to certain key employees (including executive officers). The aggregate maximum number of Options/SARs granted to all participants was 170,500 and the exercise price is $18.69 per share. The Options/SARs have both time vesting and performance vesting features. One-fifth (1/5) of each grant becomes exercisable in one-third increments on the first, second and third anniversaries of the approval date. On March 7, 2012, the Committee determined that all of the grants vested and become exercisable in one-third increments beginning March 3, 2012.

On May 2, 2011, the Committee recommended and the Board of Directors approved grants of 10,000 Options/SARs to each of the seven non-management directors. The aggregate number of Options/SARs granted was 70,000 and the exercise price is $17.49 per share.

On March 15, 2012, the Committee approved the 2012 Long-Term Equity-Based Compensation Program and granted awards of Options/SARs to certain key employees (including executive officers). The aggregate maximum number of Options/SARs granted to all participants was 198,000 and the exercise price is $17.01 per share. The Options/SARs have both time vesting and performance vesting features. One-fifth (1/5) of each grant becomes exercisable in one-third increments on the first, second and third anniversaries of the approval date. If the established performance goals (related to increases in private pay resident occupancy) are achieved in fiscal 2012, some or all of the remaining four fifths (4/5) of each grant becomes exercisable in one-third increments on the first, second and third anniversaries of March 15, 2012.

A summary of Options/SARs activity for the years ended December 31, 2012, 2011 and 2010 is presented below:

	Shares			Wtd. Avg. Exercise Price Per Share		Wtd. Avg. Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2010		318,000		$	9.48
Granted		272,500			16.07
Exercised		(8,000	)		7.68
Expired or cancelled		(38,000	)		7.68
Forfeited		(13,332	)		7.68
Outstanding, December 31, 2010		531,168		$	13.06		3.6		1,702
Exercisable, December 31,2010		106,706		$	11.15		3.0		546

Outstanding, January 1, 2011		531,168		$	13.06
Granted		240,500			18.33
Exercised		(34,338	)		8.24
Expired or cancelled		(122,500	)		15.86
Forfeited		(50,164	)		13.98
Outstanding, December 31, 2011		564,666		$	14.91		3.2		—
Exercisable, December 31, 2011		187,018		$	12.17		2.3		509

Outstanding, January 1, 2012		564,666		$	14.91
Granted		198,000			17.01
Exercised		—			—
Expired or cancelled		—			—
Forfeited		(126,500	)		16.19
Outstanding, December 31, 2012		636,166		$	15.31		2.6		—
Exercisable, December 31, 2012		323,020		$	13.26		1.7	$	—

The following table summarizes nonvested options outstanding and the related weighted average grant date fair value at December 31, 2012:

	Shares			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2011	$	377,648		$	5.56
Granted		198,000			7.08
Vested		(178,335	)		7.70
Expired or cancelled		—			7.70
Forfeited		(84,167	)		8.09
Nonvested at December 31, 2012	$	313,146		$	8.24

The following table summarizes options outstanding, exercisable, the related weighted average exercise price and remaining contractual life information at December 31, 2012:

		Options Outstanding					Options Exercisable
Exercise Prices		Shares	Weighted Avg. Remaining Contractual Life (in years)		Weighted Avg. Exercise Price		Shares		Weighted Avg. Exercise Price
$	7.68	74,666		1.2	$	7.68		74,666	$	7.68
$	8.27	56,000		1.3	$	8.27		56,000	$	8.27
$	15.86	40,000		2.2	$	15.86		26,004	$	15.86
$	16.05	56,000		0.3	$	16.05		56,000	$	16.05
$	16.57	70,000		2.3	$	16.57		46,676	$	16.57
$	17.01	148,500		4.2	$	17.01		—	$	17.01
$	17.49	70,000		3.3	$	17.49		23,338	$	17.49
$	18.69	121,000		3.2	$	18.69		40,336	$	18.69
		636,166		2.6	$	15.31		323,020	$	13.26

The grant of Options/SARs increased the number of diluted shares by 80,000 and 80,000 in 2012 and 2011. Compensation expense related to the director Options/SARs of $0.5 million, $0.5 million and $0.4 million was recorded in the years ended December 31, 2012, 2011 and 2010, respectively. Compensation expense related to the management Options/SARs was $0.3 million, $0.7 million and $0.3 million for 2012, 2011 and 2010, respectively. In 2011, ALC received $0.3 million in cash related to 34,338 exercised Options/SARs which had a total intrinsic value of $0.3 million. No options were exercised in 2012. Unrecognized compensation cost at December 31, 2012 and 2011, was approximately $1.0 million and $2.2 million, respectively, and the weighted average period over which it is expected to be recognized is 1.2 years and 1.5 years as of December 31, 2012 and 2011.

ALC uses the Black-Scholes option value model to estimate the fair value of stock options and similar instruments. Stock option valuation models require various assumptions, including the expected stock price volatility, risk-free interest rate, dividend yield, and forfeiture rate. In estimating the fair value of Options/SARs granted, the Company uses a risk free rate equal to the five year U.S. Treasury yield in effect on the first business day after the grant date. The expected life of the Options/SARs (five years) was estimated using expected exercise behavior of option holders. Expected volatility was based on ALC's Class A Common Stock volatility since it began trading on November 10, 2006, and ending on the date of grant. Because the Class A Common Stock has traded for less than the expected contractual term, an average of a peer group's historical volatility for a period equal to the Options/SARs' expected life, ending on the date of grant, was compared to the historical ALC volatility with no material difference. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. Because of a lack of history, the forfeiture rate was estimated at zero percent of the Options/SARs awarded and may be adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate. The Options/SARs have characteristics that are significantly different from those of traded options and changes in the various input assumptions can materially affect the fair value estimates. The fair value of the Options/SARs was estimated at the date of grant using the following weighted average assumptions.

	March 12, 2012			May 2, 2011			March 2, 2011			May 3, 2010			March 3, 2010
Expected life from grant date (in years)		5			5			5			5			5
Risk-free interest rate		1.11	%		1.88	%		2.21	%		2.13	%		2.33	%
Volatility		55.52	%		57.68	%		58.63	%		62.60	%		63.70	%
Dividend yield		—			—			—			—			—
Weighted average fair value (per share)	$	7.08		$	8.87		$	9.69		$	8.99		$	8.74